Stocks

Avery Dennison Stock Could See Higher Levels

Despite a 50% rise since the March 23 lows of this year, at the current price of around $118 per share, we believe Avery Dennison’s stock (NYSE: AVY), a global materials science company best known for its labeling products, looks attractive and it could offer more upside from the current levels. AVY stock has moved from $78 to $118 off the recent bottom compared to the S&P which moved 56%, with the resumption of economic activities as lockdowns are gradually lifted. AVY stock has partially recovered to the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. However, AVY stock is up only a meager 8% from levels seen in early 2018.

The 8% rise over the last 2 years appears to be low, given that the company saw its revenue grow 7% from $6.6 billion to $7.1 billion, and it also managed to expand its Net Margins from 6.8% to 7.9%. This clubbed with a 5.7% decline in total shares outstanding meant its earnings were up a strong 32% on a Non-GAAP per share basis. Despite, the revenue and earnings growth, the company’s P/E multiple has contracted. We believe the stock is likely to see more upside despite the recent uptick and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 8% Change in Avery Dennison Stock between 2017 and now?‘, has the underlying numbers.

Avery Dennison’s P/E multiple changed from 22x in 2017 to 20x in 2019. While the company’s P/E is 18x now, there is a potential upside when the current P/E is compared to levels seen in the past years, P/E of 22x at the end of 2017 and 20x as recently as late 2019.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has impacted apparel production at large, and, in turn, the sales of Avery Dennison’s labeling products. The company reported a 15% decline in Q2 sales, while its EPS plunged over 43% due to margin contraction. The impact on the company’s sales thus far appears to be lower compared to other industrial companies, and given its robust liquidity position it has decided not to cut its dividend. The company’s management in its recent earnings conference call stated that it expects to generate $500 million in free cash flows this year, comparable to the 2019 figure of $512 million.

Avery Dennison acquired Smartrac, a radio frequency identification (RFID) products company in March of this year, and its integration has bolstered the RFID products sales for the company. RFID and specialty label products are high value business for Avery Dennison, and the expansion in this market will bolster the company’s sales and margins going forward. Looking at valuation, Avery Dennison stock is trading at 18x its trailing adjusted earnings, and 20x its 2020 average consensus earnings of $5.95. The multiple appears attractive when compared to its historical levels, and the stock could offer more gains for investors wiling to invest for the long-term.

Looking at the broader economy, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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